The U.S. Department of Energy has rejected all bids submitted in the Mar. 5 semiannual sale of crude oil from Elk Hills Naval Petroleum Reserve (NPR-1) in California.
DOE said all 19 bids for the 53,740 b/d of crude were too low. The bids ranged from $11.71 to $14.06/bbl, with the top bids for the highest quality Stevens zone crude averaging $13.25/bbl.
California oil companies said they bid what the market would bear, explaining a surplus of Alaskan crude on the West Coast has driven down the price of local crudes, notably heavy crudes.
DOE will extend the current oil purchase contracts through April while it issues a new request for bids. It planned to issue the solicitation Mar. 23 and receive bids Apr. 15.
BASE REFERENCE PRICE
DOE said the latest bids averaged less than its published "base reference price" for only the second time in the last 14 bid openings dating back to 1986. The bids were nearly 76/bbl below the reference price. One sale in 1987 saw bids slip under the reference prices an average of 10/bbl.
DOE sets the base reference price by using a combination of Alaskan North Slope crude and a blended crude, both sold in California. The reference price is used to adjust Elk Hills crude contract prices to reflect market changes in California during the sales period.
DOE said, "In recent bid openings, the average winning bids for Elk Hills Stevens zone crude ranged from 85/bbl to as much as $1.86/bbl above the base reference price, reflecting largely the high value placed by California buyers on the oil's relatively high quality.
"The Stevens zone crude is typically lighter than most crudes produced in the state, making it easier to transport and refine. It also is a valuable blending agent for heavier crudes in the area."
In case the next bids also come in low, DOE has begun talking to pipelines about the possibility of shipping Elk Hills crude to Strategic Petroleum Reserve sites in Texas and Louisiana. Law requires it to explore that possibility if Elk Hills prices are deemed too low.
DOE recently announced it will resume buying crude for the SPR, following a 19 month hiatus prompted by Iraq's invasion of Kuwait.
Companies buying Elk Hills crude complained DOE's rebidding of the sale is unrealistic. And some complained about the contract extension that requires them to continue buying oil at a price they think is $2/bbl too high for the current market.
Tom Hunt, executive vice-president of the California Independent Petroleum Association, complained to DOE that independent producers rely on light NPR-1 crudes to blend with heavier oil so the latter can be transported.
He said if the oil were shipped to the SPR, "it would cause a severe disruption in an already fragile transportation and refinery system in the central valley. Heavy crude prices already at near record lows will drop even further, producing wells will have to be shut in, and jobs displaced."
Hunt said, "We can certainly empathize with the federal government's displeasure at the price being bid for its West Coast crude production. In truth, it is somewhat ironic to find DOE Questioning the fair market value of NPR-1 bids received against what it would contend is the true value of its crude oil based on other than California prices.
"This is exactly the concern independents in California have for years expressed-no shouted-in regard to the price of crude posted by major oil companies here on the West Coast."
Hunt said DOE should not ship the crude out of state and "turn a blind eye on the fact that NPR-1 is an integral player on the California crude oil scene. Its sudden exit would bring significant financial harm to innocent parties involved, mainly the independent producer and small refiner.
"They would be left with heavy oil and no place to put it.
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